Financial Advisers Need To Dispel Two Big Myths About Investing In IPOs

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Advisors Need To Dispel 2 Key Myths About IPOs For Their Investors (The Wall Street Journal)

Retail investors love IPOs because they believe that they are getting in at the start, writes Brian Hamilton, of North Carolina-based Sageworks in a new WSJ column.

However, he thinks it is important for advisors to remind them of the harsh truth, which is, that at the time of the IPO the investor is "at the end of a long line behind angel investors, venture capitalists, and private-equity firms." While both groups face risks, the "upside of the investment is capped because the value has already been tapped out."

Investors are also prone to believe that only "financially sound companies go public." But many are not profitable and this raises the risk in owning that stock. "Once you help them shake this notion of winning the lottery, clients can see that the offering, while still appealing, has to be approached just like any other investment."

Defined Maturity Bond Funds Have Been Growing But Investors Need To Be Aware Of Trade-Offs (Vanguard)

Defined-maturity bond funds (DMFs) made up less than 1% of the $3.3 trillion U.S. bond fund market as on June 30, 2013, but have seen "notable growth" in recent years, according to Vanguard's Joel Dickson, John Escario, and Samantha Choa. DMFs combine the "best features of individual bonds-such as known maturity date and return of principal in the form of final investment value-with the diversification benefits associated with mutual funds and ETFs." But there are "trade-offs" when it comes to DMFs. Trading costs will have a higher drag on return, and these also have more concentrated reinvestment risk because maturity proceeds are typically reinvested all at once, rather than being staggered," they write.

"Although DMFs may be helpful to investors who have highly predictable, near-term liabilities that they wish to pre-fund, traditional bond funds generally provide cost and structural advantages for investors implementing and maintaining fixed income exposure in their asset allocation approaches. "

The Next Big Investment Story Will Be About Who Gets The Larger Slice Of The Market (Richard Bernstein Advisors)

Many are worried about a stock market correction and are in part basing it on the notion that record-high profit margins will eventually contract. But, "a myopic focus on profit margins may miss an important investment consideration," writes Richard Bernstein, CEO of Richard Bernstein Advisors. "Whereas most investors remain fearful of margin compression, we prefer to search for an investment theme that could emerge if margins do indeed compress."

Instead Bernstein thinks that market share rather than profit margins will be the next major investment theme. "Basic economics states that profits are not solely a function of margins, but also of the number of units sold. Companies often fight for market share (i.e., a greater number of units sold) when margins contract. Accordingly, our investment focus has shifted toward themes based on companies who might gain market share." For now Bernstein sees market share stories in the American Industrial Renaissance, Japan, and small US banks.

This One Chart Shows Why Predicting Stock Market Moves Is Ridiculously Hard (Business Insider)

The S&P 500 returned a whopping 30% in 2013 closing at an all-time record high of 1,848. Yet, at the start of the year, the median-year end S&P 500 target was 1,560, a 9% gain. Forecasters largely got their earnings forecasts right, but valuation proved to be much harder to nail down.

"In a simple return decomposition, this reversion has been the largest driver of the movement of long-term equity returns over time," said Vanguard's Joseph Davis, Roger Aliaga-Diaz, Charles Thomas, and Andrew Patterson. "This supports our long-held view that valuations, not growth, are the most significant drivers of returns." Unfortunately valuations are very hard to predict.

SEC BarsFormer Oppenheimer Fund Manager, Brian Williamson (Investment News)

The Securities and Exchange Commission (SEC) has barred former Oppenheimer & Co. fund manager Brian Williamson after he was accused of falsely inflating the value of a fund he managed, reports Mason Braswell at Investment News. "Investors rely on truthful and complete disclosures about valuation methodologies and fund fees and expenses, especially when committing to a long-term private-equity investment," Julie M. Riewe, co-chief of the SEC Enforcement Division's Asset Management Unit said. "Williamson misled prospective investors by marking up the fund's interim valuations and concealing his role in enhancing its reported performance."

Williamson left Oppenheimer in 2011. Oppenheimer was not a respondent in this case and settled all the issues tied to this in May 2013, according to Williamson.